Key takeaways
- Act before year-end on PTET elections. State pass-through entity taxes must generally be paid by December 31, 2026, to qualify for a federal deduction for tax year 2026, and some states require the election itself to be made before year-end.
- Evaluate your nexus footprint and gross receipts exposure. Economic nexus thresholds vary by state and can trigger sales tax collection obligations and gross receipts tax liabilities even for businesses operating at a loss or selling wholesale.
- Accelerate software purchases before new sales tax rules take effect. California and Colorado will begin taxing electronically delivered and cloud-based software starting January 1, 2027. Purchasing or renewing licenses before that date could yield meaningful savings.
As the end of 2026 approaches, many taxpayers are holding tax-planning meetings with their CPAs and financial advisors. Even though federal taxes are important to evaluate, state tax considerations are also a critical part of effective tax planning.
Here are several state income and sales tax planning opportunities that businesses and individuals should consider for year-end:
Planning for businesses
As your business closes out 2026, several state income and sales tax planning opportunities deserve attention now to avoid costly penalties and missed savings later.
Economic nexus analysis
States’ economic nexus thresholds are based on specific amounts of annual gross revenue from sales to in-state purchasers. Our reference table provides the thresholds for states that use economic nexus concepts. If you expect that your projected 2026 sales in any state will likely exceed that state’s threshold, you can start making estimated payments now and avoid penalties and interest in 2027. Additionally, you can also identify the states in which you are required to collect sales tax and start collecting before uncollected liabilities become significant.
Gross receipts taxes
Even though tax planning usually conjures thoughts of income taxes, many states impose taxes based on something other than income, such as net worth or gross revenue. Because gross receipts tax liabilities may exist even for businesses that operate at a loss or are exempt from sales taxes as wholesalers, all companies should pay special attention to whether they have nexus in one of the eight states that impose a gross receipts tax.
Here are a couple of examples:
- In states like Washington, the economic nexus threshold is only $100,000. The exposures can add up fast with recently enacted rates of 0.5% for wholesalers and retailers and up to 2.1% for general service businesses.
- In Oregon, the penalty for being noncompliant with its gross receipts tax for three consecutive years is 100% of the tax.
Pass-through entity taxes
For S corporations and partnerships, state pass-through entity taxes (PTET) are a great way to help their individual owners save federal personal income tax. Now that Maine has enacted its own PTET, all states with a personal income tax except North Dakota, Pennsylvania, Vermont and Washington, D.C. offer them.
The reason for focusing on PTET issues as part of year-end planning is that, in general, state taxes must be paid (not just accrued) by the end of 2026 to qualify for a 2026 federal deduction. In addition, in states like Utah, the PTET election must be made by the end of 2026 to be valid.
Sales tax on software and digital goods
Currently, California and Colorado (at the state level) do not impose sales tax on electronically delivered software or cloud-based software (SaaS). California also does not impose sales tax on digital goods. However, beginning January 1, 2027, both states will start taxing these products and services. If you have a large software purchase that you were planning on making in 2027, you could benefit from purchasing it in 2026 before it becomes taxable in those two states. If you’re currently subscribed to a software that will become taxable in 2027, you may be able to ask your software provider to bill you for an annual license renewal prior to 2027 in order to realize the sales tax savings.
Reverse sales and use tax review
Have you been taking advantage of all sales tax exemptions you are entitled to? If you think some purchases may have slipped through the cracks and weren’t purchased without tax, it’s a good idea to conduct a reverse sales and use tax review to identify those and submit a refund claim before they are out of statute. For most states, the statute of limitations is three or four years. If you try to claim a refund for a purchase made before that, the state will automatically deny your claim.
Additionally, a reverse sales and use tax review can help identify areas where use tax should have been paid but wasn’t. Identifying use tax deficiencies now can help save on interest and penalties if corrected on your own rather than waiting for an auditor to find them.
Planning for individuals: Statutory residency planning
As our article on dual residency explains, it is possible to be a tax resident of two states for the same year: one based on domicile (intent) and one based on day count (statutory residency).
So, if your time spent in any non-domicile state for 2026 is approaching the 183-day mark, you still have time to plan your travel for the rest of the year to avoid going over that threshold. Otherwise, you may have to file as a full-year resident in two states for 2026.
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Wipfli’s state and local tax advisors help businesses navigate multistate nexus, compliance risk and state tax planning, reducing SALT exposure, improving your compliance posture and minimizing audit risk. We also offer corporate tax planning services designed to minimize tax exposure, optimize entity structure and align your overall tax strategy with your business objectives. Develop your tax strategy.